I cut my eye teeth with the great value investor Al Frank, and have now passed a quarter century with his namesake firm, working my way up from the proverbial mail room in 1987 to Director of Research in 1989 to Chief Portfolio Manager in 1989. I now serve as the Chief Investment Officer of Al Frank Asset Management (AFAM) where I lead a team that scrutinizes hundreds of stocks for money management clients, shareholders of our proprietary mutual funds and subscribers to The Prudent Speculator investment newsletter of which I am editor. I have appeared on numerous television and radio programs, and I am frequently interviewed by print and online publications while I also conduct workshops at various investment seminars. I graduated magna cum laude from the University of Southern California in 1987 with a B.S. degree in computer science and a minor in business administration.

What To Buy When The Market Is High (And Volatile) Part IV

“Russia will continue to make all efforts for a very fast de-escalation of tensions with Ukraine,” said a state-run news agency on Friday morning. And with that, what had appeared as of last Thursday evening to be shaping up as another equity market rout when trading resumed on Friday quickly turned into a sizable nearly 186-point rebound in the Dow Jones Industrial Average when all was said and done. Interestingly, both our benchmark Russell 3000 index and the S&P 500 index ended at levels Friday that were right about where they began the month of August, despite the sizable ups and downs over the six individual days of trading.

Once again, we see that the lens through which volatility is measured makes all the difference, as someone who left July 31 for summer vacation and returned this past weekend would have seen virtually no change in the value of his or her portfolio, but those who watched every twist and turn might have grown a little queasy. Sadly, many market participants are not able to ignore short-term gyrations, which is why Wall Street is heavily focused on risk, with traditional volatility metrics centered on one-month time periods.

While we understand that risk must be gauged in some fashion, we’ve never quite understood why someone who has a three-to-five-year or even longer time horizon should care much about standard deviations of monthly returns. Indeed, the chart below illustrates what has happened historically with different measuring sticks.

Obviously, stocks could have continued to head south last week, especially given the continued tensions in Gaza and the news that the U.S. had launched “limited” airstikes in Iraq, but the markets offered yet another lesson of why we constantly state that the only problem with market timing is getting the timing right. Indeed, as Mark Hulbert wrote in this weekend’s Wall Street Journal, “Trying to time the market is by and large a losing proposition, even for the pros.”

Happily, Mr. Hulbert added, “Little wonder, then, that market timing is rarely even attempted by the advisers who have made the most money over the past 15 years. The three top performers over this period, among the 200 advisers monitored by the Hulbert Financial Digest, are the Investment Reporter, edited by Marc Johnson; the Prudent Speculator, edited by John Buckingham; and the Turnaround Letter, edited by George Putnam.”

He continued, “All three advisers favor so-called value stocks, preferring to invest in companies that, despite solid long-term fundamentals, are trading for relatively low valuations as measured by indicators such as the price/earnings ratio. Often their recommend stocks also pay a large dividend. Furthermore, all three advisers hold stocks for several years before selling them.”

One of our recent value-stock recommendations is Axis Capital Holdings (AXS). Axis is a global specialty insurer and reinsurer which offers a diversified portfolio of specialty commercial property and casualty insurance and reinsurance, emphasizing high severity and low frequency business. AXS represents a solid specialty franchise with an experienced management team, with 29 branches spanning five continents. We like that leadership is focused on controlling costs and bringing specialist under­writing to new target markets, as well as creating more business balance and decreasing volatility.

Second-quarter earnings of $1.63 per share easily topped consensus estimates of $1.19. The beat was led by both underwriting earnings and investment income. The firm generates attractive free cash flow and has been actively repurchasing shares, with an additional $450 million remaining in its current program. AXS yields 2.4% and sports a P/E ratio of less than 8.

We also think that Tidewater (TDW) is another stock to hold onto for years. With more than 275 vessels and another 30 under construction, TDW is the world’s largest provider of supply vessels and marine support services to the worldwide petroleum drilling industry. TDW provides towing, transport and barge services in four geographical segments: Americas, Asia/Pacific, Middle East/North Africa and Sub-Saharan Africa/Europe.

We believe the firm will realize an operating boost from its ongoing program to modernize its fleet via new builds and acquisitions. As this program slows, we see opportunity for the company to use cash currently allocated to capital expenditures to further strengthen its balance sheet to deal with industry uncertainties, as well as to return capital to shareholders through increased dividends and share repurchases. Additionally, we like that TDW is more geared to international markets, where there is seemingly more demand stability for its services than is currently available in North America. Tidewater boasts a 2.0% dividend yield and a 12.5 P/E ratio.

Opinions expressed are those of John Buckingham, chief investment officer of Al Frank Asset Management, Inc. (AFAM). a division of AFAM Capital, Inc., and are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results or investment advice.

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